Good afternoon, everyone. A very warm welcome to the webinar of Wharf Group annual results briefing. I am Angela Ng, Investor Relations Manager. Our management team in the webinar include Mr. Stephen Ng, Chairman and Managing Director, and Mr. Kevin Hui, Director. Before the presentation and Q&A session, we will first invite Chairman to give an opening remarks.
Thank you, Angela. Of course, we are here to talk about results for 2019, which was last year. But as you would have noticed from the headline in our announcement, what is currently catching our attention, and probably your attention as well, is the virus outbreak which started four weeks ago. That is potentially a very important, very key factor in the company's performance this year. Not only the company's performance, Hong Kong's performance and the world's performance in 2020, we can talk a little bit more about that later on. But of course, what may have caught your attention is the statistic that is included in our announcement, that our net profit attributable to shareholders for 2019 was HKD 14 billion lower than a year earlier, and that represented 78% decline. As we tried to explain in the announcement, nearly all of it came from IP revaluation.
Whereas in 2018, we had a surplus of HKD 8 billion. In 2019, it turned into a deficit of HKD 5.7 billion. The delta there is HKD 13.7 billion. The HKD 5.7 billion IP deficit reflected the view of the valuer as at the end of December last year. It has not taken into account changes in market values since then. Of course, with the economy slowing, with the economy in Hong Kong and the property market in Hong Kong slowing, a reduction and adjustment in IP values was probably not a surprise to you. Of course, we took that into the book to come up with the net profit for the full-year. Otherwise, different parts of the business were affected by the problems last year differently and by the problems this year differently. We can spend some more time to talk about that later on.
But first of all, maybe I can ask Angela to take you through the presentation. Angela.
Thank you, Chairman. Now, I believe that you will see our PowerPoint presentation on your computer screen or mobile device. The theme of the presentation is Virus Outbreak Steepens the Economy Slide. Visitor arrivals and retail sales experienced drastic drop in the second half of the year. In spite of a respectable first half, the full-year performance recorded the largest decline since the outbreak of SARS in 2003. Hong Kong slipped into a recession in the third quarter of last year, with full-year GDP in contraction for the first time in a decade. On top of that, the outbreak of coronavirus has deepened the drop in retail demand. Harbour City witnessed a record year in terms of retail sales in 2018, with more than 30% surge as compared to the previous two years. However, the sales in 2019 decreased by 23%.
Despite the prime assets and proven management capabilities provide a temporary cushion to the market downturn, the pressure was getting heavy in the second half of the year. Turnover rents income component dropped drastically by 49% in the third quarter, and 78% in the fourth quarter. Rental income of Harbour City decreased by 12% in the fourth quarter last year. Virus outbreak has deepened the drop in retail demand. The performance of the first quarter of this year would be noticeably affected also by the material rent relief measures and marketing aid programs granted. Supported by the good performance in the first half, the revenue of our Hong Kong IP portfolio eased by less than 1%. Office rental recorded single-digit growth, which helped slightly to buffer the retail rental decline. In 2019, retail rental accounts for over 60% weighting of total rentals. Moving on to our financial highlights.
Group revenue and underlying profit both decreased by 3%, thanks to the good first half product results and sales. As explained by the Chairman at the opening, taking the net IP valuation deficit of HKD 5.7 billion into account, profit attributable to shareholders decreased by 78% to HKD 3.9 billion. A full-year dividend total HKD 2.03 per share was declared. Total dividend decreased by 3% accordingly per distribution policy of 65% of core underlying net profits. In the following slides, we will mainly walk through the performance of Harbour City, Times Square, Plaza Hollywood, Central Portfolio, Singapore Portfolio, as well as the financial management and outlook. Let's start with Harbour City. Harbour City has undergone adjustment in the market downturn. Retail sales at Harbour City decreased by 23% for the full-year, following the outperformance versus Hong Kong overall retail market in the first half of last year.
The total revenue from Harbour City decreased by 3% to HKD 11.6 billion. The revenue breakdown is shown in the chart, with retail revenue dropped by 1%. Meanwhile, the office sector faced intensified competition and vacancy in the market. Hotel performance is also under heavy pressure due to the drop in visitor arrivals. Harbour City has the largest retail offerings in town, with over 500 tenants. Its diversified retail ecosystem includes long-term partner of the best-in-class retailers. The rental income distribution by different types of tenants is shown in the chart, and trade mix is being constantly reviewed to enhance the most attractiveness. Value-accretive and engaging marketing initiatives are in the plan to attract shoppers to return and consume. Moving on to the three Marco Polo Hotels in Harbour City.
Prince Hotel was closed in February this year for major renovation, which aims to create a sustainable long-term business future for the cluster of the three Marco Polo Hotels on Canton Road. Occupancy of the three Marco Polo Hotels was over 18%, outperformed the industry average. Hotel occupancy and room rate remain under pressure due to the increased uncertainties and intense competition. We will walk through the performance of Times Square and Plaza Hollywood. Under the weak market sentiment and intensified competition, total revenue at Times Square decreased by 3% to HKD 2.8 billion. Foot traffic and sales performance were seriously affected by the recent disruptions. Retail revenue decreased by 4%, and retail sales decreased by 19%. Office sector was affected by the business sentiments and increased vacancy nearby. Switching to Plaza Hollywood. Supported by local consumption, Plaza Hollywood retail sales recorded a mild drop of 7%.
Retail revenue decreased by 3%. Located above the Diamond Hill MTR station, which is the interchange of new Tuen Ma Line phase I and Kwun Tong Line, Plaza Hollywood is set to embrace the Kowloon East CBD2 potentials and expand its geographical reach. In the following slides, we will focus on the Central portfolio comprising Wheelock House, Crawford House, and The Murray. Occupancies at Wheelock House and Crawford House remained high on the back of prime locations and cost effectiveness for tenants. The Murray Hong Kong operate under Niccolo brand is under full operation since August 2018. Affected by recent disruptions in Hong Kong, occupancy and room rates were under pressure. Despite a positive GOP in 2019, startup loss was recorded due to the depreciation of land and building costs. In December, the footprint of the group's prime IP portfolio was expanded to include Singapore.
Wheelock Place and Scotts Square contribute to around 2% of the group's business assets. Located in the heart of the Orchard Road belt, these two value accretive assets both record occupancy. The occupancy of Wheelock Place was 96%, and occupancy of Scotts Square was 97%. Moving on to the financial management. The group maintains prudency in financial management. Net debt increased to HKD 42.6 billion. Gearing ratio remained comfortable at 19.3%. Average interest cost was 2.6%. The group continued to maintain the Moody's A2 rating with stable outlook. Looking ahead, the first half of this year will see the whole world preoccupied with the virus outbreak, and the development of second half will most probably depend on the intensity of the damage. The storm clouds also include the local social political events and the Sino-U.S. tension. In the near term, multiple factors are affecting Hong Kong's recessionary trends.
Retail and hotel sectors are not expected to be spared from threats. In addition, office occupancy rates and rental levels are under more pressure. In the last part of the presentation, I will walk through our efforts in CSR. Wharf REIC is a member enhancing corporate sustainability index. Our youth development programs include The Wharf Hong Kong Secondary School Art Competition and The Wharf Art Scholarship, as well as The Architectural Design Internship Programme. Project WeCan is a business in community initiative to provide opportunities and care to the secondary school students. Our business units are now supporting 16 partner schools. That concludes the end of my presentation. Now, we will come to the Q&A section. Just a little housekeeping before we get started. We welcome both verbal and written questions, and first, we will receive the verbal questions.
If you have any questions, you can use the icon on your Zoom control panel to raise your hand. We will then unmute your line. We will receive the first question from Karl of Bank of America. Hello, Karl. Maybe you have to unmute yourself in the pop-up box.
Can you hear me now? Hello? Can you hear me now?
Better. Yeah.
Yes.
Okay. We can now hear you.
Okay, good. Yes. Stephen, can you talk a little bit about, based on the sort of renewals that you have done, the deals that you have done so far for 2020, what kind of rental reversion picture would you expect on the retail side, both at the Harbour City and also Times Square? Also, clearly, occupancy cost is going to be through the roof, I think, in the first quarter. Where do you think more medium term, what would be the sustainable level of occupancy cost? Thanks.
Sure. Thank you. At the moment, the market is very unstable. We do not yet have sales reported by our tenants for the month of February. January is history, and January was before the virus outbreak. February, generally, business was slower than January. I can give you by way of indication, our own experience from the hotels we operate in Harbour City. I do not think that is too different from other five-star hotels in Hong Kong. I believe most, if not all five-star hotels in Hong Kong, traded at sub 10% occupancy in the month of February, i.e., single-digit occupancy. When compared to business from a year ago, I suspect total revenue from the month of February this year would probably be no more than 5% or at best 10% of what it was a year ago. That is how bad hotels are doing right now.
Of course, hotels are much more heavily reliant on visitors than general retail or general F&B. You will have noticed too, that even Hong Kong people are not consuming nearly as much as they were or used to. A lot of people are staying home because of work from home. Others, if they do come to the office, they bring their own lunch, and as soon as they finish in the office, they go home. So local consumption is way down. Which is why I say it is a very unstable period, and it is not even meaningful to talk about what rental levels we are achieving right now, because we are not doing deals right now. A lot of negotiations are stalled, and so there is no good indication based on our experience in the past three weeks or so.
Generally, however, we hope when the virus outbreak comes under better control, then the lease discussions will resume. Certainly, rentals will no longer be as good as they were a year ago or even six months ago. I do not think I have a good gauge right now as to how much lower they would be compared to six months ago or 12 months ago. Not yet, unfortunately. Sorry.
Occupancy cost.
Well, occupancy cost, it is very much a function of sales, too. Right now, sales is generally very abnormal and you cannot compare abnormal sales to recurrent rental. You take the hotels as an example. If their revenue is as low as what they are, they do not even pay for utilities. So what occupancy costs can you discuss?
Okay. We will receive the next question from Ken Yeung from Citi.
Hello. Can you hear me?
Yes.
Hi. Thanks for taking my questions. I think the first question comes on the occupancy. You got 97% for both Harbour City and Times Square. How is the latest, let's say, as of February, and how do you see going forward, let's say, towards the middle of the year? Of course, you definitely have some of the leases probably already renewal. You have some more confident on the occupancy level in the next couple of months. This is firstly on the occupancy.
Second question's on rent relief or rent concession. Have you given any rent concession in the second half of last year? There's a new saying that you have given 50% of rent relief in the month February. Can you clarify or give us more color on what kind of rent concession? Is it across the board, every tenant is getting 30% or 50%, or what kind of level that you are giving in February, and is it likely to be going into March, April, et cetera?
Okay, first question, occupancy. Current occupancy in the retail section is not that different from what it was at the end of the year. But I think it's probably reasonable to expect vacancy to increase. At this point in time, we don't think vacancy will go up too quickly or by too much. But it depends on how long this virus problem continues, and whether the recovery from it is sharp enough. At the moment, we are not projecting a bullish year for the current year, and that's probably no surprise to you. What is going to hit us more is first half results because there are only six months in a half, and the first half will take the vast majority of the hit from the virus. The virus problem started in late January, so-called February.
If the virus problems continues for three months, it would mean three out of six months, as against for the full-year, three out of 12 months. So I think the first test will be when we announce interim results in August. But it is reasonable to expect occupancy to slide, and not only for retail, and I should add also for office, because the office market is also under pressure. Companies are not expanding, or most companies are not expanding because the general economy is uncertain. To the extent that we all know what the Fed did two nights ago, rather abruptly. So in this environment, demand for office is soft. Supply, given the additional new buildings, new projects in the past few years, will increase. So both retail and office will experience softer markets, and therefore, quite likely higher vacancy, and softer rental. Rent concessions.
We have been offering rent concessions to tenants. But we don't do it on an across-the-board basis. Because different tenants treat differently. And we don't discuss with anybody other than the tenant themselves on a bilateral basis what the deal is. A, we have a confidentiality undertaking, mutual confidentiality undertaking between ourselves and the tenant under the tenancy agreement. B, I don't think it's fair for us to discuss tenant A's terms with tenant A's competitor who is tenant B or vice versa. These are bilateral relations and we deal with them on a bilateral basis. Yes, in the month of February, we have and you have picked it up yourselves. Some of our tenants did receive concessions of the magnitude that you asked about. But I can't confirm that that is universal, and I will not confirm that that is universal.
Thank you. We will now receive the next question from Andy So from Haitong. Hello, Andy.
Hi, management. Can you hear me?
Yes.
Yes. First of all, on the revaluation loss, I just would like to ask, we registered our very first revaluation loss in the past six years in 2019. May I know if we have changed our cap rate? Secondly, is it fair in saying that we are very likely to register an even bigger revaluation loss in the first half of this year? On the retail sales numbers, can you share with us what is the change of the retail sales for your tenant in the first two months of this year? Thank you. On a year-on-year basis.
Right. Okay. Still with cap rate first. Or rather, IP revaluation. To my knowledge, the cap rate did not change.
No, cap rates didn't change.
It's the same cap rates. It's probably no surprise that even at the same cap rates, the outlook, which is a good part of the basis of revaluation, was different as at December of last year compared to June of last year. The next part of your revaluation question concerns coming June. That is a big question because we all know that since the end of last year, i.e., since December, the reference date for the last set of revaluation, the market has softened even further, to the extent that February was a very bad month, as my hotel example illustrated. If in case retail sales continue to be so soft in the remaining months of the first half until June, I would not rule out a further deficit at all. But of course, we're not the valuer.
The professional valuers, they take a view about what the market value of these properties are. But I can't imagine if the retail market is in very poor state, then they would not be marking down the assets further. That's my view. Kevin, anything to add?
Yeah. It still depends on the projection of the renters when they do the valuations, as at the date of the valuations.
Yeah. As far as we're concerned, it's not a commercial decision. It is very much a technical piece of work by the professional valuers. They tell us this is, in their view, what the properties are valued at, and we just take them into the accounts. Okay? Retail sales in the first half of this year or so far this year, I certainly don't have February numbers. The best I can give you are the hotel numbers I gave you, which is no surprise, because if you ask any five-star hotel in Hong Kong, they'll probably give you very similar numbers. First half retail sales, we don't typically report on a monthly basis. We typically report on a quarterly basis.
But I think as a general indication, the weakness in retail sales in the fourth quarter of last year continued into the first three weeks of January until the virus hit.
Okay. Now we will receive the next question from John Lam, UBS.
Are you there, John?
Hi.
Hi.
Can you hear me? Oh, yeah.
Yes. Now we can.
Oh, okay. Thank you. First of all, thank you for your presentation. I have three questions here. Number one, regarding on the dividend payout ratio, because this is pretty much that this year will be a pretty difficult year. Not sure if the management may probably try to increase the payout ratio in order to maintain a relatively stable DPS. Second here is that regarding on the margin. I noticed that the company is giving out some cash coupon at Harbour City. I am not sure whether that will increase the cost and also affect the margin. Third is regarding on the gearing. As of last year end, we have gearing about 19%. I am not sure what would be the comfortable level of the gearing. Thank you.
Okay. Dividend payout ratio. When Wharf REIC was separately listed a little over two years ago, we stated very clearly our policy is to distribute 65% of realized profit, underlying profit from our Hong Kong properties, including hotels. We have been adhering to that policy ever since listing. We saw no reason for 2019 for that to change. At this moment in time, we see no reason for that to change in 2020 either. Having said that, I think it is obviously much too early to predict what the board would decide when it comes to first interim dividends, which is the decision the board needs to take in August based on performance in the first half and based on the company's financial position at that time.
But up to now, I think our basic position is adherence to the 65% payout ratio that we made very clear to investors at the time of our separate listing. Second question concerns margin. Yes, we have been handing out promotion coupons both in Harbour City and Times Square, but this is not the first time we have done it. We have been doing similar promotions in our shopping malls in the past, and this is a variation of what we did in the past. Scale-wise, probably similar. But of course, total sales have declined and total rental is very likely to decline. When rental income is declining at a time when costs may go up, and when I say costs going up, that has less to do with the cost of promotion than the general cost of operating.
Salaries have gone up and we have had to spend more on cleaning to keep the properties hygienic. So, cleaning and hygienic investments, and all of those things. We are having to spend more to market, including these promotion coupons. So if we had been operating on a margin of 89% in the past, which we were operating margin, if rentals fall and costs go up, yes, there would be a squeeze on operating margin. I think that is only natural. Gearing, 19%, 20-ish %, we are very comfortable. We do not just look at the technical gearing ratio. That is not the most important factor to us. The most important factor is cash flow. Whether or not we can generate enough cash to service debt, that is our number one concern. With interest rate not likely to go up, our debt service capability should be quite comfortable.
We are not concerned.
Thank you. Let us receive the next question from Colin from Goldman Sachs.
Hi, it's Justin with Goldman. Can you hear me?
Yes.
Thanks for taking my question. Perhaps it's also an addition to that gearing discussion in a way that, as you mentioned, you are very comfortable with the level of leverage and capacity for the company, given that you have also taken two Singapore buildings by the end of last year. Also with the increased volatility in the operations in Hong Kong, would you envision to go more into overseas in order to diversify the risk or the portfolio in a way, given that you might still have some gearing or debt headroom in a way? The other question perhaps is about the potential privatization on your parent company.
Can you comment a bit on how you see the potential continuity of management or the way the strategy or how a potentially private versus a public parent co looking at this vehicle, would there be any change or would there be any difference in the priority of the entire group? Thank you.
Okay. Thank you. Overseas investment, we are not currently looking, and I do not think when there are many things which are taking much higher priority than looking overseas or looking at new investment even in Hong Kong right now. In fact, one of our priorities is to conserve cash from operating the current assets more efficiently. In terms of capital expenditure, the board has taken a view that we will defer the discretionary capital expenditure as much as possible. Unless there is a good reason to incur it, we will defer it. There would sometimes be good reasons. Good reasons, for instance, if it would help us to secure a particular tenant, it would help us to significantly lift the competitiveness of a part of our portfolio. Yes. Otherwise, the general direction is to defer discretionary capital expenditure and to conserve cash in this very uncertain time.
Privatization, I cannot comment too much about the privatization, as you well know. We would be governed by the takeovers code about what we can say and cannot say. As a general point to respond to your question, is that Wharf REIC is a separately listed company. We have a controlling shareholder in the form of Wheelock and Company Limited. As far as we can see from what has been announced so far, Wheelock and Company Limited will continue to be the controlling shareholder in our company. We do not see any direct impact on the way our company will be operated as a result of the privatization. I think that is probably the best answer I can give you within the confines of the code.
Okay. Thank you, Justin. If you have any verbal question, you may press the raise hand button. If no more verbal question, we will now move. Ken Yeung from Citi has follow-up questions.
Hi. Because you are talking about the rent relief, all the things. I just also want to ask about the reversion outlook. Given that last year you talked about single digit, that kind of positive reversion, how was that achieved in the second half last year? How do you see in what have you so far done, for the, let us say, first half or 2020 on the reversion outlook? Secondly is, given that you are quite concerned on your CapEx, all this thing, how do we see your interest in, let us say, there is a potential upcoming central commercial site, your appetite, your interest on this site?
Okay. Rental reversion. It has not been positive reversion, as you would expect, and we don't expect positive rental reversion, generally for the rest of this year either. But that's a function of the market because the market has changed since six months ago or 12 months ago. As far as the new site in Central is concerned, of course, it is something that we would look at. We understand it is on the government's calendar, and it's probably in the second half of this year. We don't know at this stage the parameters of the sale. What is allowed and what is not allowed, how is it going to be done, and all of that.
Of course, we will take a look at it, but I don't think it's possible for us to form any view right now as to our interest in participating, either by ourselves or with partners, to submit a bid for that particular site. It's simply impossible at this point in time.
If no more verbal question, we will now move to the Q&A box, the written question.
First, the question from Jeff. Please tell us the occupancy cost ratio for Harbour City and Times Square for 2019. And the second question, please tell us the rental reversions for office and retail portfolio, respectively.
In 2019?
Yes.
2019 is history. But occupancy cost, I think you need to look at it this way. It is almost a watershed around the middle of last year. The first half of the year was reasonably good. The second half was very soft, as all of us know. So occupancy cost on a full-year basis is one thing. What is more important is probably to look at occupancy cost for instance, the last quarter of last year. Except that, hopefully, that is not a recurrent base. All of us hope that things will not stay at that low level for any prolonged or protracted period. But of course, in the first quarter of this year, things are worse than what they were in the last quarter of last year.
At this time of instability, it is not very useful to refer to one quarter or even one whole year to try and use that as a basis for looking forward. It is not a period of relative stability. Do we have some numbers that we can share with them?
Yeah. Actually, for Harbour City, the occupancy cost was 23%, and for Times Square, it was 24%.
I just caution that when you use that to try and project forward, be very careful.
We will receive the next written question from Cusson Leung from JP Morgan. First one is the occupancy cost, which we already covered. The second one was the tenant sales growth for the fourth quarter last year for Harbour City and Times Square. The next one is regarding the dividend payout ratio. Under what circumstances will the management consider raising it to reduce the volatility in the DPS?
Okay. Occupancy cost, we've covered. Tenant sales growth in the fourth quarter was?
Actually, for Harbour City, the tenant sales dropped by around 50%.
Dividend payout, as I have already indicated, we have no current plan to change from the policy that was advertised at the time of IPO. Okay.
Okay. The next written question from Karl of Bank of America is, we were pulling out of Harbour City office and the turnover rent as a percentage of retail rental income in the second half of 2019, what is the figure?
I can't discuss whether one tenant is pulling out or another tenant is coming in. That's not fair. The next question, percentage of retail rental-
The turnover rent.
Okay. Very low. Turnover rent, as we have reported, it fell by 78% in the fourth quarter of last year-on-year. It became a very low single digit of the total retail rental.
Mm-hmm. Yeah. Maybe I can give you an idea of the full-year rent, turnover rent. It was 112% of retail rental income for Harbour City.
But for the second half, it was single digit.
Yeah.
Low single digit too.
Just a reminder, you may type your questions in the Q&A box if you have any questions to ask. If there are no more question, I believe this is the end of the Q&A section.
Okay. Well, thank you. The big test is, of course, the virus. We all hope the virus will go away quickly, but that is not in our control. As far as we can see, Beijing government is doing a very respectable job in trying to control it. They can do it much better than many other countries, given how efficient they can be in organization. We are optimistic that inside mainland China, the problem can come under control reasonably quickly. We, not in this company, but in a sister Wharf company, we operate a hotel in Wuhan, and this is a bit of anecdotal. Of course, that hotel is right in the epicenter of the virus problem. Ironically, that hotel is doing extremely well with occupancy because Beijing has sent in emergency medical workers from all over the country.
The Marco Polo Wuhan is host to over 200 of these so-called EMWs, emergency medical workers. They are working day and night. The feedback we are getting from Wuhan is that the worst may be over in Wuhan. Hopefully a bit of first in, first out, and then others will follow quickly. But the virus is certainly causing a great deal of fundamental issues, not only to China, but to the world now increasingly, economically, socially, and possibly politically. Unfortunately, we are not in control of that situation. But we believe in the longer run, when the virus problem is over, things will get back to normal, hopefully more in a V shape rather than a U shape. Consumption hopefully will come back. People who have been locked up in homes get itchy with their wallets, opening their wallets again and all of that.
While we are cautious and we want to make sure that our tenants, our shoppers and our staff and everybody is well-protected against this threat of virus, we are also getting ready for the day when public health is no longer an issue and when people are ready to consume again. Let us pray. In the meantime, as I have already indicated, the first half of this year, given the concentration of the virus problem in the first half, I would not expect that there is enough time for us to catch up because two months have already passed and there is no immediate end to the virus problem within the next few weeks. At best, we have one quarter to catch, I mean, second quarter to catch up to the hit we have taken in the first quarter. That is simple arithmetic, and I am not making a forecast.
It is simple arithmetic.
Thank you, Chairman. The PowerPoint presentation of the annual results will be uploaded to our corporate website shortly, and we will also send it to you. Thank you for joining us today, and we hope to see you next time.
Thank you.
Thank you.
Bye-bye.